Despite decline in mortgage demand, consumer debt exceeds $17 trillion for the first time

The total amount of consumer debt climbed to a record high in the first quarter of 2023, surpassing $17 trillion, even with a significant decline in home borrowing.

According to the New York Federal Reserve, borrowing across all categories reached $17.05 trillion, indicating a 0.9% increase of nearly $150 billion during the January-to-March period. This represents a total indebtedness hike of approximately $2.9 trillion since the pre-pandemic period in 2019.

This increase occurred despite new mortgage originations, including refinancings, totaling only $323.5 billion, the lowest level since the second quarter of 2014. The total amount was 35% lower than in the fourth quarter of 2022 and 62% lower than the same period a year ago.

The peak for new home loans was $1.22 trillion in the second quarter of 2021 and has been in decline due to increasing interest rates. A series of rate cuts by the Federal Reserve helped drive 30-year mortgage rates to a record low of around 2.65% in January 2021.

Currently, rates have risen to approximately 6.4% due to the central bank implementing 10 rate increases, amounting to a total of 5 percentage points, to combat inflation. This data is based on information provided by Fannie Mae. The higher rates contributed to raising total mortgage debt to $12.04 trillion, representing a 0.1 percentage point increase from the fourth quarter.

Borrowers took advantage of the previously lower rates to both purchase new homes and refinance existing ones, with the latter experiencing a boom that appears to have now subsided.

“The mortgage refinancing boom is over, but its impact will be felt for decades to come,” stated Andrew Haughwout, director of household and public policy research at the New York Fed.

According to data from the Fed, approximately 14 million mortgages were refinanced during the pandemic that began in March 2020. Around 64% of these refinances were “rate refinances,” wherein homeowners sought to benefit from lower borrowing costs. On average, these borrowers saved approximately $220 per month, as reported by the New York Fed.

“As a result of substantial equity drawdowns, mortgage borrowers reduced their annual payments by tens of billions of dollars, providing additional funds for other spending or debt reductions in different categories,” added Haughwout.

Despite the increase in rates, mortgage foreclosures have remained low. Delinquency rates for all debt types have increased, with credit card delinquencies rising by 0.6 percentage points to 6.5% and auto loan delinquencies increasing by 0.2 percentage points to 6.9%. Overall delinquency rates have risen by 0.2 percentage points to 3%, the highest level since the third quarter of 2020.

Student loan debt rose to $1.6 trillion, while auto loans also saw a slight increase, reaching $1.56 trillion.